Investors Should be Aware of this Risk in 2024
2023 has been a great year for equities. Global stocks (MSCI ACWI) are up 19.36% for the year while the S&P 500 (500 largest companies by market capitalisation in the U.S.) is up 24.69%.
In the U.S. index, a large proportion of the 24.69% return this year has came from only 10 stocks. If you are a passive investor holding index funds and ETFs, or a stock picker that has concentrated positions in the top 10 stocks in the index, 2023 has been a great, but you might be risking underperformance in the coming years.
Research shows that stocks that make it into the top 10 experience almost 25% higher returns than the market 3 years before, however in the ensuing three years, the outperformance drops to less than 1%.
For example, the technology giant Intel posted impressive average annualised excess returns of 29% in the 10 years before it made it into the top 10. After it made it into this exclusive club, it underperformed the market by almost 6% per year in the next decade.
Not too long ago, these high flying stocks experienced large drawdowns in 2022. For example, companies like Amazon and Nvidia lost almost half of their values and companies like Meta and Tesla lost more than -60%. (AMZN -48.37%, NVDA -49.48%, META -61.34%, Tesla -67.86%)
Investing in large and well-known firms can bring great returns but is not a longterm winning strategy, it can cause you to bear heavy losses and exposes you to unnecessary concentration risk and underperformance.
Rather than concentrate on well-known mega-cap stocks that dominate headlines, investors should focus on diversifying their portfolio across securities and geographical markets such that they are able to capture the returns of any company that ascend to the top in the future anywhere in the world.
Most of us would trust an accomplished physician to manage our health. After all, physicians have specialised training, real-world experience and access to tools outside the reach of the general public. Most importantly, they took an oath to prioritize the patient’s health over their own interests.
In the way same, GYC adapts insights from financial science to each client’s individual situation. We look at clients’ financial health holistically and work with them to create a plan that aims to accomplish their unique goals. We are a trusted partner who can help when times are tough.
If you would like to know how you can invest with a peace of mind and increase your probability of success, click here to schedule an exploratory chat with us. (Complimentary 30-minute session).